1. What are Taxes? Chapter 14 Section 1

2. Why Taxes?
Taxation is the primary way that the government collects money.
Without revenue, or income from taxes, government would not be able to provide goods and services.

3. What Gives Government The Power To Tax?
Article 1, Section 8, Clause 1 of the Constitution grants Congress the power to tax.
The Sixteenth Amendment gives Congress the power to levy an income tax.

4. Limits On Taxation
The power to tax is also limited through the Constitution:
1. The purpose of the tax must be for “the common defense and general welfare.”
2. Federal taxes must be the same in every state.
3. The government may not tax exports.

5. Tax Base A tax base is something that is subject to a tax Income
Property
Good
Service

6. THREE TYPES OF TAX STRUCTURES MARY’S TAXES ON $150,000 INCOME
TYPE OF TAX
DESCRIPTION
EXAMPLE
RON’S TAXES ON $50,000 INCOME
MARY’S TAXES ON $150,000 INCOME
PROPORTIONAL
Tax for which the percentage of income paid in taxes remains the same for all income levels.
“FLAT TAX”
$7,500 OR 15% OF INCOME
$22,000, OR 15% OF INCOME
PROGRESSIVE
Tax for which the percent of income paid in taxes increases as income increases.
“INCOME TAX”
$5,000, OR 10 % OF INCOME
$45,000, OR 30% OF INCOME
REGRESSIVE
Tax for which the percentage of income paid in taxes decreases as income increases.
“SALES TAX”
$2,000, OR 5% OF TOTAL PURCHASES 0F $40,000
4% OF INCOME
$3,000, OR 5% OF TOTAL PURCHASES 0F $60,000
2% OF INCOME

7. Characteristics of a Good Tax
A good tax has the following characteristics:
Simplicity
Tax laws should be simple and easily understood.
Efficiency
Government administrators should be able to collect taxes without spending too much time or money.
Certainty
It should be clear to the taxpayer when the tax is due, how much is due, and how it should be paid.
Equity
The tax system should be fair, so that no one bears too much or too little of the tax burden.

8. Who Bears the Burden of a Tax?
To fully evaluate the fairness of a tax, it is important to think about who bears the burden of the tax.
The incidence of a tax is the final burden of the tax.

9. Exemptions and Deductions
Set amounts that you subtract from your gross income
Examples:
Yourself
Your spouse
Any dependents.
Variable amounts that you can subtract from your gross income.
Examples:
Interest on a mortgage
Donations to a charity
Some medical expenses

10. Corporate Income Taxes
Like an individual, a corporation must pay a federal tax on its taxable income.
Corporate income taxes are progressive
As a company’s profits increase so does the amount paid in taxes.

11. Social Security and Medicare (Removed Through Federal Insurance Contributions Act (FICA) Tax)
This program is funded by the Federal Insurance Contributions Act (FICA).
Most of the FICA taxes you pay go to
Social Security
Disability Insurance (OASDI)
Medicare is a national health insurance program that helps pay for health care for people over 65 and for people with certain disabilities.
Medicare is also funded by FICA taxes.

12. Unemployment (Removed Through Federal Insurance Contributions Act (FICA) Tax)
Unemployment taxes are collected by both federal and state governments.
Workers can collect “unemployment compensation”
They are laid off through no fault of their own
They are actively looking for work.

13. Other Types of Taxes Excise Taxes
An excise tax is a tax on the sale or production of a good. Federal excise taxes range from gasoline to telephone services.
Estate Taxes
An estate tax is a tax on the estate, or total value of the money and property, of a person who has died. Estate taxes are paid before inheritors receive their share.
Gift Taxes
A gift tax is a tax on the money or property that one living person gives to another. Goal was to make sure people paid taxes on what they were giving away before they died. Today, one can give up to $10,000 tax free per year.
Import Taxes
Taxes on imported goods are called tariffs.

14. Mandatory and Discretionary Spending
Mandatory spending
Discretionary spending
Money that lawmakers are required by law to spend on certain programs or to use for interest payments on the national debt.
These are mostly retirement, entitlement, and support programs
This area has grown in recent years
Spending about which government planners can make choices.
This area has decreased in recent years

15. What Are Some of The Programs?
Mandatory Spending Examples
Discretionary Spending Examples
Social Security
Medicare
Medicaid
Food Stamps
Retirement Benefits
Veteran Affairs
Education
Scientific Research
Student Loans
Law Enforcement
Environmental Cleanup
Housing

16. Cause To Worry
Why are budget planners and politicians worried about more mandatory and less discretionary spending?

17. Federal Spending Which categories receive the most federal funds?
Why are these categories so important?

18. The Largest Discretionary Program
Spending on defense accounts for about half of the federal government’s discretionary spending.
Defense spending pays
Military personnel salaries
Buys military equipment
Covers operating costs of military bases

19. State Budgets
Just like people, governments must plan their spending ahead of time.
States have two budgets
Operating Budget
Capital Budget

20. Operating Budget
A state’s operating budget pays for day-to-day expenses.
Examples:
Salaries
Supplies
Maintenance of state facilities

21. Capital Budget
A state’s capital budget pays for major capital, or investment, spending.
This money usually comes from:
Long-term investments
The sale of bonds

22. Balanced Budget Some states have laws requiring balanced budgets.
These laws, however, only apply to a state’s operating budget.
Why is it easier to balance state budges than to balance the federal budget?

23. Receiving Money
What are the major sources of state revenue?

24. State Tax Revenues Limits to State Taxation
Because trade and commerce are considered national enterprises, states cannot tax imports or exports. They also cannot tax goods sent between states.
Sales Taxes
Sales taxes are the main source of revenue for many states.
Other State Taxes
Different states have various other means to collect revenue, such as state income taxes, excise taxes, corporate income taxes, business taxes, and property taxes.

25. Spending Money
What are the major categories of state government spending?

26. Where Are State Taxes Spent?
Education
State education budgets help finance public state universities and provide some aid to local governments for elementary, middle, and high schools.
Public Safety
State governments operate state police systems, as well as correctional facilities within a state.
Highways and Transportation
Building and maintaining highways is another state expense. States also pay some of the costs of waterways and airports.
Public Welfare
State funds support some public hospitals and clinics. States also help pay for and administer federal benefits programs.
Arts and Recreation
State parks and some museums and historical sites are funded by state revenues.
Administration
Like the federal government, state governments spend money just to keep running.

27. Local Tax Revenues
Property taxes are the main source of local revenue.
These taxes are paid by people who own
Homes
Apartments
Buildings
Land.
Local governments sometimes collect
Excise
Sales
Income taxes
Some taxes, such as room and occupancy taxes, are aimed at nonresidents in order for local governments to earn additional revenue.

28. What are the major sources of Local government spending?
Spending Money
What are the major sources of Local government spending?

29. Local Tax Spending
The following is a brief list of the many functions that local governments carry out or assist in:
Public school systems
Law enforcement
Fire protection
Public transportation
Public facilities, such as libraries and hospitals
Parks and recreational facilities
Record keeping (birth/death certificates, wills, etc.)